Retirement Planning Shouldn’t Be Like Counting Jelly Beans

May 06, 2016

When I was growing up, there was a local store that would “give away” a huge stuffed animal to a person who could guess the exact number of jelly beans in a gigantic jar. I think that stuffed animal was still in the store when my kids were about the age I was when I first saw it. There may not be a right answer to that question. After all, did someone spend most of a day painstakingly counting jelly bean after jelly bean and keeping a running tally? Is the number that the store owner believes is correct an actually correct number?

After this long, I’m sure some of the jelly beans have merged together and that might change the correct number anyway. I don’t know if people have actually won the stuffed animal and there are lookalikes that keep getting placed where the old one was…or if it’s one constant big bear sitting there taunting everyone who guesses at the number of jelly beans. But it is certainly a source of entertainment and mystery for kids and for that, I’m thankful that it’s there.

Entertainment and mystery…that’s how many of the people I talk to view their financial lives. They see the “game” of planning for retirement a lot like the jar of jelly beans. “How many are in the jar?” Who knows? “How many will it hold?”

“How much money will I need to live the rest of my life?” “When should I take Social Security?” “How much should I contribute to my 401(k)?” “What will taxes look like in my retirement period?”

These questions aren’t that much different from the jelly bean question, but they certainly are a LOT more important in the grander scheme of life. The good news is that with some thought, some preparation and some planning, you’ll be able to get much closer to the “right answer” with your retirement questions than I ever got with the jar. I am a big fan of simplicity, so when I meet someone who is completely baffled by the concept of retirement planning, I go through a quick retirement reality check with them. It’s a two stage process and I’ll share it here:

Step 1: We use this Retirement Estimator calculator to see if their current course of action will get them close to reaching their goals. If they are on track, we check in annually to make sure they’re staying on track and to see if anything new has developed. If they aren’t on track, we tweak some things to see what it would take.

What happens if they increase their 401(k) savings rate? What if they work a few more years? What if they change their investment strategy and shoot for more growth?

During this step, we make sure they have current statements from any and all investment accounts, including their 401(k). We also talk about and enter any income streams like Social Security, pensions, rental income, etc. It’s a pretty straight forward calculator and we can usually build it in less than 15 minutes as we talk through the inputs.

Step 2: This is my “real world” sanity check of the numbers from the calculator. We look at their take-home pay based on their last few paychecks and figure out a monthly amount that they’re living on today. We can even shrink that number if they are regularly saving money, because those funds aren’t being spent now. We add back about $1,000 for medical coverage and some inflation, since that’s usually being deducted from net pay today.

Then we look at Social Security and pension income and come up with a gap that would be needed from investments. If it’s $1,000/month, I like to annualize that and call it $12,000 per year. Divide 12,000 by 3% (a fairly low withdrawal rate from a portfolio) to get to the amount of money they’d need in their investment accounts ($400,000 in this case – in today’s dollars). This is far from an exact way to calculate retirement needs, but it can help validate the results of the calculator. And, it’s a very easy and understandable way to see what retirement might look like.

Once people know the results, that’s when the real work begins. Sadly, not nearly enough people have ever run a retirement calculator. According to our 2015 Year In Review research, only 22% of the population knows that they are on track to replace 80% of their current income in retirement. That means there is a lot of work to do! Most people have never even run a retirement calculation.

Doing this quick two-step process puts you ahead of the game because at least you know where you stand. Only then can you knowingly make progress. Use the calculator – today! And use my way-too-simple sanity checker as a backup. If you do those two things, you’ll move from hoping you can retire at some point to knowing what it will take to retire when you choose and you’ll end up with a lot more than a stuffed animal.